How to calculate minimum tax

Generally we know that if any taxpayer’s taxable income exceeds the minimum taxable threshold then he has to pay tax on that exceeded amount at a certain percentages.

But if his tax liability as calculated on that exceeded amount does not cross the minimum tax ceiling then he has to pay the minimum tax as set by the NBR based on the location of taxpayers even though if his tax liability on his taxable income is lower than that amount.

What is the minimum taxable income threshold?

You know the last few years minimum taxable income threshold in general cases is BDT 250,000. But there are some exceptions in some cases where this limit varies. The followings are the minimum taxable threshold in special cases:

Types of person
Woman and 65 years or more old taxpayers
Total taxable income (BDT): 300,000
Person with disability
Total taxable income (BDT) : 400,000
Gazette wound freedom fighter
Total taxable income (BDT) : 425,000

If any taxpayer is the parents or legal guardian of disable children then his minimum taxable income threshold will be BDT 25,000 higher than his/her normal minimum taxable income threshold.

But if both the father and mother of the disable children is taxpayer then any one from them will get this benefit.

So now we have get the minimum taxable income threshold and when this limit will exceeds any person’s income then he/she will be liable to pay tax to NBR in Bangladesh.

If you are a salaried person then full income from your salary will not be included with your total taxable income.

In each area you have a certain limit of exemption what will be excluded from your income. After excluding those exemptions you have to calculate total taxable income from your salaries.

After that if your tax liability on such taxable income falls below the minimum tax ceiling then you have to pay the minimum tax as set by the NBR.

Minimum tax ceiling

If any taxpayer’s taxable income exceeds the minimum taxable threshold as mentioned in the above paragraph then taxpayer should be liable to pay minimum tax based on his/her location as follows:

It means if any taxpayer’s taxable income exceeds BDT 250,000 and calculated tax liability found below the above amount mentioned in the table then he/she has to pay the above amount as tax to NBR for the particular located taxpayer.

As per example, Mr Karim lives in Dhaka North City Corporation and his total taxable income is BDT 270,000 and minimum tax threshold is BDT 250,000 then his tax liability will be BDT 2,000 {(BDT 270,000-250,000)X10%}.

But he has to pay BDT 5,000 as minimum tax though his actual tax liability on his taxable income is BDT 2,000.

Here we do not consider the tax rebate. Taxpayer is entitled to get benefit of tax rebate on his investment allowance as prescribed by the NBR.

And the calculation will be changed if the taxpayer has any investment or donation in such particular areas.

What will be the minimum tax after consideration of tax rebate?

Government encourages the taxpayer to invest or donate in particular sectors and get tax rebate on that invested or donated amount.

The investment and donation have two way benefits. One is future capital benefit from his today’s investment or benefit of society from his donation. And two is tax rebate enjoying by taxpayer which reduces the tax liability.

So if any taxpayer has investment allowance, firstly he has to calculate tax rebate on his investment allowance and then deduct tax rebate from his total tax liability. After that the amount which will come out will be the net tax liability.

Here again we may use the above example of Mr Karim. His total taxable income is BDT 270,000 and his eligible investment allowance limit will be BDT 67,500 (BDT 270,000X25%).

So his tax rebate will be BDT 10,125 (BDT 67,500X15%).

But his tax liability is BDT 2,000. If we deduct tax rebate from this amount we will get negative figure.

But Mr Karim has to pay BDT 5,000 as minimum tax.

This is not the last!

Guess you have read my previous article where I have described how to determine minimum tax and there you have introduced details about minimum tax under section 82C in Income Tax Ordinance 1984.

If you have any income under section 82C and tax deducted at source by responsible person from such income then your minimum tax liability will be changed.

What will be the minimum tax if any income falls under the section 82C?

If you gone through the full list of 82C minimum tax then you will get total 28 sections from where if you have any income under any of those sections then your minimum tax figure will be changed.

Suppose, you have income under section 82C and the tax deducted at source is BDT 15,000.

Then what will be your tax liability?

Again we may go to the example of Mr Karim. His tax liability is negative after considering the tax rebate. But as the BDT 15,000 tax deducted at source under section 82C minimum tax so it will be the minimum tax for the income year.

No adjustment is applicable.

I guess when you have read the section 82C minimum tax you have found 5 sections which will have to be considered as final settlement. And in those cases the tax liability calculation will be fully different.

What will be the final settlement tax treatment?

The deduction from any of the five sections under section 82C should be considered as final settlement.

If your tax liability falls below the amount deducted as final settlement then you could not adjust it but if your tax is calculated as per regular tax rate and such rate is higher than the final settlement tax rate then no need to pay more tax on that amount. This is the benefit of final settlement.

But how you will show your final settlement tax with your regular tax liability?

To show the treatment of final settlement tax with regular tax liability I will use a different example here. Hope you will understand the issue clearly.

Suppose you have an investment in savings instruments and you have received BDT 300,000 as interest from such savings instruments and you have get BDT 285,000 after deduction of tax BDT 15,000 at source at the rate of 5% which falls under final settlement.

From other sources your total taxable income is BDT 580,000.

So what will be your tax liability?

Your total taxable income is BDT 880,000 (580,000+300,000). But when you will calculate your tax liability you have to set aside the income from interest of savings instruments as it falls under the final settlement.

So your tax liability will be BDT 33,000 {(880,000-300,000)X10%} excluding income from interest on savings instruments.

Assume that you have invested in the eligible areas as mentioned in the sixth schedule part B of Income Tax Ordinance 1984.

In that case your investment allowance will also be on the taxable income excluding income under the finale settlement i.e. interest on savings instruments as you are enjoying special tax rate on that amount.

So your investment limit will be BDT 145,000 (580,000X25%). And tax rebate on this amount will be BDT 21,750 (145,000X15%).

After deducting the tax rebate from regular tax liability the tax liability would be BDT 11,250 (33,000-21,750).

So now you have to add BDT 15,000 which is deducted as final settlement with regular tax liability and your total tax liability will be shown as BDT 26,250 (BDT 11,250+15,000).

As you have already paid BDT 15,000 as final settlement at source so you have to pay only BDT 11,250. This is the due tax amount to NBR.

The important issue is that the amount deducted as final settlement has to show in your return of income as total tax liability.

So be careful all about your income and tax deduction at source.

If any tax is deducted by any responsible person from your income then of course collect challan from that responsible person before submission of your return of income to the NBR. Because you have to attach those challan copies with your return of income as a proof of your tax payment.